A record boom in Tehran's stock market will end in a spectacular crash that
could trigger a prolonged depression producing multiple bankruptcies, mass
unemployment, and acute economic hardship, analysts say.

The warning follows months of soaring share prices that have prompted officials
in Iran's Islamic regime to proclaim that the country's economy is flourishing
despite fresh international sanctions aimed at combating its nuclear program.

The Tehran bourse index passed 17,900 on August 30, compared to 12,537 points
on the final day of the last Iranian year in March, following a sustained wave
of stock sales and purchases. The

upward trend has pushed the exchange's total value to more than US$80 billion,
up from $70 billion in mid-July. [A month later, on September 29, the index had
risen further, to 18,535 - Editor's note.]

However, the bull market has been dismissed as a "state-created bubble" by
seasoned analysts who attribute it to the deliberate buying and selling of
assets by supposedly private companies that are in reality owned by
organizations like the Islamic Revolutionary Guards Corps (IRGC), which has
been playing an increasingly dominant role in Iran's economy.

One economist says a stock-market crash is "inevitable" and could result in a
disastrous financial collapse comparable to those that afflicted Russia in 1998
and Argentina in 2001, with grave consequences for Iran's political and social
stability.

Iranian officials have dismissed such criticisms. Ali Sahraei, the Tehran Stock
Exchange's operations manager, said the rise reflected an overall improvement
in the Iranian economy.

"Concern about bubble growth are unfounded," the foreign-based "The National"
newspaper quoted him as saying in a statement released through the bourse. "The
reason for the rise in the index is the flow of cash into the stock market."

Beneath the surface
The boom has perplexed market analysts. Ahmad Alanani, Middle East and North
African regional director of Exotix, a London-based investment bank, previously
described the Tehran market as "underperforming" but now says he is puzzled.

"I thought it was underperforming before in the context of the Persian Gulf,
but it has stopped making sense," he says. "Every other single index in the
world has come off in the last month [August], the Persian Gulf is in a lull -
yet the Tehran Stock Exchange is on an upward trajectory and that doesn't make
sense to me."

He said that while he hadn't been following that market particularly closely of
late, when he last checked he didn't see "bank-leveraged trading" as especially
prominent. "That could have changed now - it could be a lot of hot money that's
inflating valuations," Alanani says. "But you also hear some positive things
about Turquoise Funds, which is raising money from Iranian expatriates. It's a
very tricky market to judge because despite everything, it remains a bit
closed."

Such warnings mirror disquiet in Iran's parliament, the Majlis, which has
ordered an inquiry amid doubts among lawmakers over the boom's causes and
potential effects.

Mehrdad Emadi, a London-based Iranian economic consultant for the European
Union, conducted an investigation that he says uncovered solid grounds for
suspicion. After examining the share prices of seven of Iran's biggest
companies - including the giant Mokhaberat telecommunications corporation,
taken over last year by an IRGC-led consortium - he concluded that the
increases were driven by government-led manipulation.

"There is absolutely no rational explanation in a country where productivity
has been falling in the last 28 months consistently, [where] every quarter
profitability has been negative for 92% of state-owned banks, and the banking
system is highly indebted, to see such a boom in stock prices," Emadi warns.
"They do not reflect the profitability, they do not reflect the confidence in
the economy, so it tallies that it is the reflection of the injection of new
demand and money. Obviously this is kind of a bubble. But it is a state-created
bubble, instead of sort of a market-induced bubble."

But it lacks the hallmarks of a classic stock-market boom, Emadi's
investigation found. Three of the companies surveyed actually showed losses and
negative rates of return over a period after April 2009, once inflation was
accounted for. Private individuals wishing to sell shares were quoted lower
rates than the official market price for transactions between companies -
effectively meaning a two-tier system was in place. And the high trade volume
and increased profitability normally associated with such booms was absent.

Interested parties
The upward cycle benefits both buying and selling companies by enabling them to
borrow more - something all firms in Emadi's survey have sought to do.
Increased borrowing is in line with official policy, as reflected by Iran's
Central Bank governor, Mahmud Bahmani, last week when he asked parliament's
approval to use $15 billion from emergency foreign-currency reserves to finance
greater lending by the banks, which are thought to be near bankruptcy.

Critics say Iran's banking system is highly indebted. The goal, Emadi believes,
is twofold: to encourage confidence in the economy and thereby prevent capital
flight; and to prevent a banking collapse by persuading small depositors to
keep faith in the banks.

"The government has acknowledged that the biggest front they are fighting in
managing the country is economic, and in that aspect of crisis management banks
are an early warning system," he says. "When people feel really insecure about
the ability of banks to meet their obligations, they pull out their money. We
have seen this in Mexico, in Argentina, in South Africa. They pull out their
deposits, convert it into hard currency and buy gold. If this happens, it's
conceivable that within a couple of months we could see very big state-owned
banks going bankrupt and that would be an outcome that government really would
not be able to manage and cope with."

One other motive could be the government's policy of dispensing "justice
shares" under Iran's privatization law, which reserves 20% of all privatized
shares for the poor. President Mahmud Ahmadinejad's government may be seeking
to placate a constituency already hit by sanctions and facing the prospect of
further hardship with the phasing out, due to begin later this month, of state
subsidies on energy products and other goods. Subsidies cost the Iranian
treasury an estimated $100 billion a year but critics have warned that their
abolition could stoke inflation and provoke social unrest.

Meir Javadenfar, an Iranian-born commentator with the Middle East Economic and
Political Analysis company in Israel, says rising share values help the
government offset the effects of sanctions and the abolition of subsidies. "The
government knows that both are going to create a lot of dissatisfaction amongst
the poor," he says, "And by keeping the share prices higher, it is trying to
deflect criticism and the repercussions of such criticism from people,
especially the lower income brackets of society who are mostly government
supporters."

Pressing question
The downside of the boom is that it is almost certainly unsustainable - and the
Iranian economy is unlikely to enjoy the benefit of a soft landing. Instead,
economists like Emadi fear a crash that could prompt the panic-selling of
assets at knock-down prices, companies defaulting on their debts and
bankruptcies leading to mass joblessness, already estimated to have risen by at
least 40% during Ahmadinejad's five-year tenure.

"If you have a crash in the stock market and lots of these companies - say,
just for the sake of argument, 20% of them - go bankrupt. Given that 75% of
private-sector employment is really through state-owned companies, that could
easily translate to another 1.5 million people losing their jobs," Emadi says.
"You have the typical components of a financial crash leading to very, very
deep and probably longish - maybe longer than a year - depression, where you
will have more companies going bankrupt, more banks declaring bankruptcies, and
people losing their jobs. They will start selling their household furnishings.
And once you have that, it's going to be very, very difficult for people to
survive."

The decision by parliament - many of whose members have been fiercely critical
of Ahmadinejad's economic policies, including the plans to abolish subsidies -
to investigate may be fueled by such fears, according to Javedanfar.

"It is very possible that those people in the Majlis are worried about the
repercussions of a sudden crash. If and when it does happen, the political
repercussions could be massive and they could impact the stability of the
country. After the disturbances we saw consequent to Ahmadinejad's reelection,
this is a blow which some elements in the regime do not want and do not need,"
Javedanfar says.

"There's nothing wrong with Tehran's stock exchange increasing. Iran has
fantastic potential to do that. But there's everything wrong when it's done in
such an artificial way, because if and when the house falls apart, the
repercussions will be felt everywhere in Iranian society and also very likely,
within the corridors of power inside the supreme leader's office."